Failing to vet potential partners
Ronald Reagan made popular the catchphrase "Trust, but verify" regarding the former Soviet Union, but the maxim is a good one for businesses that are considering new business relationships, too, according to Sageworks analyst Samara Zippin. A customer's hand-picked credit references may vouch for a solid payment history, but if your client is extending credit, it's hard to know whether that positive track record is coming to an end without conducting due diligence on the customer's current financial condition, she said. Similarly, checking a supplier's likelihood of default based on current finances could save you money and trouble. "If they go out of business, your client could be out of a key supplier, or if they do not make their payments on time to their suppliers, that could affect your client's entire supply chain," Zippin said. "It can slow down your client's day-to-day operations."
Granting credit or granting it for too long
Turnaround expert Ted Gavin, managing director of consulting firmGavin/Solmonese LLC, said companies should guard against putting themselves in situations where they are paying more quickly than they can collect. "Extending too much credit on terms that are too long will cause an impingement on a company's cash flow," Gavin said. "If they're not collecting quickly enough, they're going to have a huge problem."
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Zippin added that even profitable businesses can be tripped up when they can'tcollect on receivables quickly enough to pay their own bills. Actually, many businesses offer credit when they don't necessarily have to or when doing so doesn't provide a financial benefit, she noted. And too often, they provide the same credit terms to all customers, rather than conducting financial due diligence and using the resulting information to negotiate terms appropriate to the risk.
Accepting credit when you don't need it
In the same way that offering credit when it's unnecessary can be problematic, so can accepting business credit when a company doesn't need it, experts say.
"One of the most important credit blunders that businesses make is borrowing when they don't need it," Zippin said. Borrowing money can add a burden to your client's business and a stressor to their life, so urge them to consider carefully whether borrowing is the wisest choice. Banks are in the business of making money; it's up to your client to optimize their financial performance and to decide whether accessing credit will help their performance.
"If your client conducts financial due diligence on their own business, they won't be as likely to go seek credit from a bank when they don't need it, because they will have a good sense of how they're doing," Zippin said. Your client may identify and correct their company's weaknesses so that they can negotiate with potential creditors more effectively or avoid seeking credit altogether, she added.
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